Overcoming The Problem Of Valuing A Small Business In Mediation

     Cases where one party is self-employed can present a special challenge in divorce mediation.  This is because a power imbalance often results due to the self-employed party’s knowledge of the small business that they own and operate. The business is community property because it was started during the marriage, but one spouse may be completely unfamiliar with the business because they were not involved in it during the marriage.  This so-called “out-spouse” may have little or no information about the business other than what the so-called “in-spouse” tells them when it comes time to file state and federal tax returns.   Accordingly, the “out-spouse” will likely distrust any claims by the “in-spouse” that the business is suddenly suffering, even in the midst of a real economic recession. 

     A cost-effective and practical solution to overcoming this problem is for the parties to hire one neutral CPA/forensic accountant to work on the financial issues and prepare a business valuation.   Obviously, this requires the “in-spouse” to cooperate fully and provide all documents requested by the CPA/forensic accountant.   The CPA/forensic accountant can work with both parties and their mediator to come up with financial plans and division of property based on the parties’ realistic financial needs.   The hiring of the CPA/forensic accountant can be without prejudice to either party so neither party is bound to accept the business valuation.  Because the joint CPA/forensic is a neutral he/she can meet with each party individually to explain the business valuation report.    Each party is also free to hire their own CPA/forensic to review the work of the neutral CPA/forensic.  This is still less expensive than both parties hiring thier own CPA/forensic. 

     This approach is especially effective in cases where there is no money to finance litigation.   Once upon a time, parties would use the equity in their homes to hire experts such as CPA/forensic accountants and conduct extensive discovery in an effort to determine the value of a small family business.   Today, with little or no equity in their homes, parties have no “bank” upon which to draw these funds.   However, even where equity or other funds may exist to finance litigation, parties need to ask themselves whether spending all that money will ultimately make sense.